But Resist Interfering in Its Investment Choices

Congress will improve the retirement security of millions of federal workers if it agrees to add auto-enrollment to the Thrift Savings Plan (TSP), a part of the federal government's employee retirement system. Under auto-enrollment, a worker participates in TSP unless he or she opts out of it. On June 19, the Federal Retirement Thrift Investment Board (FRTIB), which manages TSP and has a fiduciary responsibility to ensure that TSP operates solely for the benefit of federal workers, voted to ask Congress for the authority to automatically enroll new and returning workers into TSP. The recommendation also has the support of TSP's Employee Thrift Advisory Council. Establishing auto-enrollment would especially help military personnel, whose participation rate in TSP is well below that of civilian employees.

Congress would, however, undermine federal workers' retirement security if it acts to limit TSP enrollees' investment options. A number of legislators have expressed support for proposals that would require TSP and other pension plans to stop investing in companies that do business in Sudan or Iran, and others want the program to establish a "corporate responsibility" investment option. In its June 19 meeting, the FRTIB also voted to strongly oppose any such legislation. These proposals would cost federal workers millions of dollars that should be going to fund their retirements and introduce politics into a program that has been solely dedicated to improving the retirement incomes of federal workers.

How the TSP Works
The TSP is one element of the Federal Employees' Retirement System, managing over $200 billion of retirement savings for about 3.7 million federal civilian employees and military personnel. Since its creation in 1986, TSP has grown from one fund that invested in federal government bonds to five individual funds and a "lifestyle portfolio" that includes investments in all five funds. TSP members control how their retirement savings are invested and have the ability to move their savings between the funds at will.

At the end of 2006, 38 percent of TSP's Assets were invested in an S&P 500 stock index fund, while 36 percent were invested in government bonds, 11 percent in an international stock index fund, 9 percent in a small and medium sized company fund, and 6 percent in a Bond index fund. Funds have been added to TSP slowly, with the government bond fund opening in April 1987, the stock and bond index funds in January 1988, and the international stock index and the small cap funds in May 2001. The lifestyle portfolios incorporating various proportions of the five funds appeared in August 2005.

TSP administrative fees are extremely low, averaging about 30 cents for every $1,000 invested (3 basis points) in 2006. This is artificially low, because federal agencies absorb some of the administrative costs, but as a result, federal employees receive one of the best bargains in retirement investing. Management of the funds is contracted out to private sector investment managers based on a periodic bidding process. Currently, all of the funds except for the government bond fund are managed by Barclays Global Investors.

A key factor in TSP's success is the limited number of funds that it makes available to members. Research shows that many participants in 401(k) plans become confused when their plan offers too many investment choices. Too many funds can actually reduce participation.

TSP's one weakness is that unless a worker designates another investment choice, his or her money goes into a government bond index fund (G Fund). While this is a safe choice that has almost no chance of losing money, it also will not earn nearly enough for a comfortable retirement income. The FRTIB proposes to address this weakness by making the lifestyle fund (L Fund) the automatic investment choice for members who do not choose to actively manage their funds and to move to automatically enroll federal workers at a certain investment amount unless they actively choose not to join.